RIYADH, May 2 (Reuters) - Saudi Arabia's stock exchange will ensure the weighting of national oil giant Saudi Aramco in its main stock index is not too large when the company lists its shares, the exchange's chief executive said on Wednesday.

"We have technical ways to address this issue," Khalid al-Hussan told the Euromoney business conference, adding that one step might be to impose an "index cap" on Aramco IPO-ARMO.SE.

He later told Reuters this would involve imposing a ceiling on its weighting in the index, a step taken by some exchanges in other countries.

Saudi authorities plan to sell 5 percent of Aramco's shares and list the firm in Riyadh and possibly one or more foreign markets this year or next, as part of wide-ranging reforms designed to reduce the Saudi economy's reliance on oil.

The Saudi exchange's ability to cope with such a huge listing, which could involve the world's biggest initial public offer of equity, is a major concern among investors.

The local stock market currently has a capitalisation of about $500 billion, while officials have said the sale is expected to value the whole of Aramco at about $2 trillion.

Petrochemical shares already account for around a quarter of the market's capitalisation, so with Aramco, the market could become dominated by oil-related shares and end up moving almost entirely in synch with oil prices, unless steps are taken.

Hussan noted that the Saudi index focused only on freely floated shares, so it would not register the 95 percent of the company retained by the government. If all of the shares sold are listed in Riyadh and no index cap is imposed, Aramco might take a weight of nearly 40 percent in the index, he estimated.

He did not specify a level for the index cap but noted that a few other stocks already had large weights in the index; Al Rajhi Bank, for example, had 13 percent.

Hussan reiterated previous statements that the exchange had tested its technical systems and these, as well as the regulatory environment, were ready for an Aramco listing.

In the past, the exchange has said it hopes to be the only market in the world to list Aramco shares. The government has not said whether this will be the case and Hussan said on Wednesday that its decision was not known yet.

Daily price movements of Saudi stocks are currently limited to 10 percent in either direction, but Hussan told Reuters that the exchange was thinking of raising the limit to around 15 or 20 percent for Aramco and other newly listed stocks, in order to ensure the best price discovery.

The exchange announced on Wednesday the creation of a central counterparty clearing house with capital of 600 million riyals ($160 million) to handle securities trading.

The clearing house, to operate fully by the second half of 2019, will reduce risk in settlements and enable the introduction of new asset classes such as derivatives, the exchange said. It aims to introduce derivatives in the second half of 2020.

Foreign institutions were allowed to begin investing directly in the Saudi stock market in mid-2015, and there are now 140 qualified foreign investors, with over 40 percent of them registered in the last quarter, said Mohammed El Kuwaiz, chairman of the capital market regulator.

Kuwaiz said the opening of the Saudi market to foreigners gave it the capacity to handle a huge Aramco IPO.

"What you effectively do is to build a pipe from this market to the rest of the world, and as long as that pipe is efficient and as long as that pipe is unencumbered, then effectively capital will flow from one centre to another, from one market to another ..." he told Reuters.

The regulator's priorities for the coming year include the listing of new companies on the stock market, including privatised firms; strengthening external and internal audits for listed firms to improve the quality of the market; and developing a corporate bond market, he said. (additional reporting and writing by Davide Barbuscia and Saeed Azhar, editing by Louise Heavens and David Evans)